Fisher's theory analysis in Iranian economy (application of VAR and VECM model)

Document Type : Original Article

Authors

• samira motaghi ¹
• samane talei ²
• ramezan gholami ¹

¹ faculty member of payame noor university

² ardakan university

https://doi.org/10.22067/mfe.2023.74290.1151

Abstract

According to Fisher's theory, an increase in expected inflation results in a unit increase in nominal interest rates, and the real interest rate, which plays a key role in shaping investment and savings behavior, remains constant, and this factor, although inflation Leads to the neutralization of monetary policy;
On the other hand, based on the theory of quantity of money and the direct relationship between the velocity of money and the general level of prices, as well as the direct effect of the velocity of money on interest rates, raising interest rates is expected to increase inflation.This effect of interest rates on the inflation index (according to some economists) is not only related to inflation and affects other macroeconomic variables, but the important issue is the type, manner and amount of this effect in the short term and It is a long-term study in the present study using VAR and VECM methods and in the period of 1360 to 1399.
The results of the study show the confirmation of Fisher's theory in the Iranian economy both in the short and long term, and suggest that there is a positive and significant relationship between the interest rate variable and the inflation index in the Iranian economy.
In addition, variable interest rate fluctuations overshadow other macroeconomic indicators, as this relationship is inverse for the economic growth index and physical investment and direct for the inflation rate index.

Keywords

• interest rate
• inflation rate
• economic growth rate
• VAR model

Main Subjects

• Financial monetary economy